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collateral noun

assets (=something valuable) that you promise to give someone if you cannot pay back money that you owe them
We used our house as collateral for the loan.

Hello and welcome to TransLegal’s lesson of the week. My name is Gregory and this week I am here to talk to you about the term behind me called collateral.

Collateral is a term used in various different contexts and has different meanings depending on how it is used. You may have seen it in terms of collateral evidence which means evidence that is supplemental or corroborative in a legal proceeding.

Collateral damage is a term that’s familiar to most of you, probably, which means secondary unintended damage. But today we’re going to be discussing the use of the term in the financial context as security. Mainly because this is a question that TransLegal gets asked quite a bit. What’s the difference between collateral and security? What type of security is collateral? And the answer to that is fairly simple, it is that collateral is security.

Collateral is a term that’s mainly used in the United States for security meaning property which is pledged in satisfaction of a debt. So if a lender has, let’s say, loaned money to a borrower and a borrower needs to pledge something as security that property is referred to as collateral oftentimes in the US. So just like any other piece of security the collateral is subject to forfeiture and can be seized if the borrower fails to repay or live up to their debt obligations.

So don’t be confused when you see it. It’s really just an American term for security. Something can be used as collateral, something can be posted as collateral, something can be pledged as collateral and the property itself is actually referred to as collateral and can be seized if payment is not made or the obligations are not fulfilled.

So hopefully this clears it up. That’s what we’re here for – to clear things up for you. So this has been TransLegal’s lesson of the week. As always you can post comments or write something in the spaces below and we’ll see you next time.

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